Bankruptcy Creates Positive and Negative Externalities

The announcement of bankruptcy being approved by the court in New York for the manufacturer of Twinkies, Ding Dongs and Wonder Bread will have both positive and negative externalities for many parties.  A negative externality arises when one party directly imposes a cost on others.  I believe that the 18,500 workers who will be laid off are experiencing a negative externality. However, the bankruptcy of the manufacture here in the United States will also have positive externalities to the sweet treat market.  Some of these externalities are found in the article “Despite US woes, Twinkies reign supremeon the Nile.  These sweet treats are very popular in other regions of the world, including the region around the Arab Gulf. There are still factories in the Arab region that will continue to make the products.  A Mexican company Grupo Bimbo is looking to purchase the brand name because of its plans to expand into North American.  Both companies will experience increased sales.  These countries will have an advantage in lowering manufacturing costs.  Such as, the cost of sugar will be lower because it will not face tariffs that are in place here in the U.S.  It was a combination of externalities that influenced the closure of the manufacturing plant in the U.S.  

1 comment:

Dr. Tufte said...

Alexa: 82/100 for 3 spelling errors.

I had heard (and was not surprised) that there are firms interested in buying the brand names. I had not heard that there are licensed manufacturers not covered by the liquidation.

This post requires a bunch of small corrections:

1)Hostess is already in bankruptcy, what they are doing now is moving towards liquidation rather than reorganization.

2) Negative externalities impose indirect rather than direct costs.

3) Sugar tariffs are not the sole cause of the high cost of sugar in the U.S. But, they are part of a system of regulations that allows sugar producers to maintain prices about 5 times higher in the U.S. than they probably should be.

4) The workers are not being laid off, which can be temporary. Instead, they are being threatened with termination, which is permanent. That's pretty direct, so I don't think that really qualifies as an externality.